A Partnership for Good Governance:
A CEO's perspective on the relationship between management
and the board
President & CEO
RBC Financial Group
Institute of Corporate Directors
2004 Fellowship Awards Dinner
Tuesday, May 18, 2004
Thank you and good evening. It's a privilege
to be a part of the 7th Annual Fellowship Awards Dinner
honouring corporate directors in Canada. I would like to
begin by offering my own congratulations to our four honourees,
about whom more will be said later. I also want to thank
Bernie Wilson for chairing this event, as he has for the
past six years.
I must say that when Bernie first asked
me to deliver tonight's keynote address, I wasn't sure what
I could usefully talk about. After all, finding something
interesting to say about corporate governance to a group
that includes governance experts and many directors would
be a challenge at the best of times.
And when you consider that just about
everything that could be said about this topic has been
said (and often), it's downright intimidating. So I thought
I would take a slightly different tack tonight and address
governance from the perspective of management.
A recent poll showed corporate executives
in the U.S. have fallen below politicians in terms of public
trust and respect, so you may think management's opinion
on governance is as useful as an arsonist's view on fire
prevention. However, I believe management's view of how
a board provides value and the relationship between management
and its board are important to the oversight and strategic
direction of a corporation.
A productive relationship between a board
and management adds value above and beyond governance, while
a non-productive relationship impairs value and increases
As the CEO of a major Canadian corporation,
I understand the importance of an active and demanding board
in assisting management to perform to its full potential.
Indeed, a board that is engaged, informed and independent
will have a significant impact on a company's future growth
More and more these days, we are hearing
the view that the governance pendulum has swung too far.
Maybe yes, maybe no; but it is beyond dispute that in recent
years there have been broad lapses in corporate governance
in the private sector involving some of the world's largest
banks and investment dealers, telecommunication and energy
companies, mutual fund and money management firms, and the
list goes on.
These have not been isolated cases
and it is now apparent that many of the issues were widespread
and systemic in nature, with personal compensation generally
at the centre.
At the end of the day, I think we would
have to agree that if the private sector is not prepared
to reign in the excesses of the free market system, then
we have to accept the consequences.
Reigning in excess, whether it is business
activity, weakness in compliance, or executive compensation,
is a joint responsibility between management and the board.
If we fail to provide the necessary self-governance, then
we will face excess regulation and inflexible rules which
will be extremely punitive to public corporations.
For business, nothing can be valued more
than the integrity of the enterprise. Without integrity,
an enterprise cannot engender trust in its financial statements,
in its business conduct, and in the way it deals with stakeholders.
And without trust, it cannot succeed and grow over a sustained
period of time. This is why an obsession with integrity
must be embedded in corporate DNA starting right at the
Unfortunately, there are always a few
rotten apples in the barrel. Large organizations are comprised
of human beings with all their frailties, and some may find
themselves faced with inappropriate activity by an individual
or small group, despite having many safeguards in place.
The defining moment in these situations
is the way in which a company identifies and deals with
this behaviour. It is critical that a company takes decisive
action, is open and transparent, and acts in the best interests
of its stakeholders. Leadership at the board can significantly
impact not only the way a company manages these types of
issues, but also the process it employs in identifying and
As a consequence of recent corporate misbehavior,
there has been much discussion about the need to completely
overhaul corporate governance practices. This discussion
has led to a thorough review of the duties and composition
of boards, the relationship between the board and management,
and corporate accountability to shareholders and other stakeholders.
Recent legislative and regulatory action
may create the impression that governance challenges have
been addressed. But I question how far we can go by relying
on regulation alone in achieving the quality of corporate
governance that is necessary for true business success.
Reliance on regulation has led some observers
to view compliance procedures, forms, and structures to
be as important as governance itself. In my view, this is
a mistake. Good process does not automatically translate
into good governance.
Don't get me wrong. The governance changes
that have occurred as a result of regulation and shareholder
pressure are, in totality, a good thing and were necessary
to rebuild public trust. But they only go half way to ensuring
I believe effective governance should
be an evolving process rather than a fixed set of rules.
This more flexible approach depends on an active and informed
board of directors that has the critical responsibility
to act as a tough and demanding task master, pushing management
to perform at its highest potential. An active board helps
to ensure more effective and better management.
An indispensable element of good governance
lies in the board's relationship with management. There
are different views, not surprisingly, on how this relationship
Some observers see directors as compliance
officers, their role simply to ensure companies meet regulatory
obligations in a timely and consistent way. Others believe
boards should operate like constitutional monarchies, simply
playing an advisory role.
I prefer a model in which the board is
much more than a compliance officer and is much more actively
engaged than simply being a source of advice. An effective
board must be an active and strategic partner in overseeing
risks and in guiding the current affairs and future direction
of the company. PricewaterhouseCoopers summed it up nicely
by saying that a board should not only look after today's
business, but ensure there's a business to manage tomorrow.
So from my perspective, good governance
requires a partnership in which directors are actively engaged
with management, providing oversight, judgment and guidance.
This requires a board consisting of informed, active, and
independent directors, which benefits from a diversity of
gender, thought and culture. And it requires the informed
monitoring of how management is discharging its own responsibilities
in matters ranging from performance, to risk taking, to
compensation, to succession planning.
Today's regulatory and legal environment
has placed enormous pressure on both management and boards.
But in my view, we should be placing greater emphasis on
culture and standards rather simply relying on compliance
and oversight. Companies need process - they are required
by law. But an organization that is focused solely on the
compliance side of governance, cannot maximize performance.
If senior executives say that they are
more afraid of losing their jobs from bad headlines than
they are from bad results, what does it say about our future
ability to take risk, to reward investors, and to succeed
in the global economy. Frankly, directors must be prepared
to stand up and support what is right, rather than what
makes good public relations.
An effective board needs the ability to
differentiate between governance and performance. A board
must understand the balance between long-term value creation
and quarterly results. It is too easy for management to
fall into the quarterly earnings trap - after all, it is
what analysts and media focus on.
But strategy, prudent risk-taking and long-term value creation
are critical issues for any board, and they are issues where
I think boards can and should be providing more leadership.
For example, boards should be engaged well in advance in
shaping strategy around major or transformational transactions.
They should have discussed and signed off on the general strategic
direction their company might take, and therefore be prepared
to discuss and challenge the merits of any proposal brought
forward by management. In many cases, boards are surprised
when major transactions are brought before them because there
has been limited prior discussion about a specific transaction
and the strategy behind it.
In most of these situations, the relationship between management
and the board is lacking something. Boards are not there just
to rubber stamp initiatives. Nor, frankly, do they have the
ability to generally challenge management given the information
and expert advice that management usually has when presenting
a proposal. But if the relationship between the board and
management is fluid and effective, then there should have
been prior discussions around the strategic merits of a transaction
well in advance of a specific discussion.
This interchange between a board and management will result
in a broader consensus with all the facts and alternatives
on the table and may impact the way management views an investment
opportunity - which if you look at the track record, has often
been through rose-coloured glasses.
I also believe that separating the role of Chairman and
CEO makes a great deal of sense in terms of both board and
management effectiveness, and this has been reinforced from
my own experience. It has provided greater clarity around
the separation of responsibility between management and our
board. It also allowed our board to set its own agenda and
facilitated greater engagement in the operation of our business.
Separating the two roles has also freed up a tremendous
amount of time for me to focus on what I believe are the key
responsibilities of a CEO, from strategy to performance management.
It has given me more time to focus on clients, employees and
other constituents. Managing a board takes a lot of time and
is not something you want a CEO to focus on.
In addition, a separate chair is a good sounding board.
I have clearly benefited from having someone of broad experience
and with few biases to talk with about difficult and sensitive
issues. In my view, there are few reasons, other than ego
as to why a CEO would want to be chairman (although I hope
this statement does not one day come back to haunt me).
A board of directors also has a special role in ensuring
the integrity of the organization by demanding the highest
levels of ethical behaviour and full transparency.
Transparency and the flow of information are key elements
in the relationship between management and its board. If a
board is well informed, it can do a better job in guiding
management and confirming its overall direction. Transparency
can also protect management from proceeding down a path that
the board might later object to, and transparency enables
management to discharge its fiduciary and regulatory responsibilities.
This audience knows more than most the importance of, and
the need for, qualified, active and committed directors if
a new governance model is to succeed. In fact, the Canadian
Coalition for Good Governance has identified the quality of
directors as the single most important requirement for good
There are consistent qualities that can enhance the contribution
of directors. From my perspective, the ideal directors are
knowledgeable about our business, and bring the benefit
of their broader experience and diversity. Ideal directors
are helpful advisors who can be a sounding board
for senior management.
It is important that directors bring experience
to an enterprise. Most decisions are not black and white,
but are made in the grey zone and many management teams have
not managed through major change or crisis. Experienced directors
can be extremely valuable for management to draw upon.
Strong directors are good communicators, capable
of giving positive and negative feedback in a way that promotes
improvement of decisions and the business in general. They
take the time to meet independently with management and to
represent the company in the community.
And finally, great directors must have the time to devote
to their responsibilities, which is one of today's biggest
challenges. I never thought I would say that being retired
or semi-retired was a positive attribute for a director, but
frankly, it is.
For a CEO and management team to be effective, they need
to know that directors will challenge them and that they will
be held accountable for their decisions. But as Guy Saint-Pierre
has said, management also needs to know that the board of
directors will support decisions, once they are made.
So I want a board of directors that challenges management's
views and insists on good decisions, but stands behind the
decisions that are made.
This view is supported by Harvard Professors Colin Carter
and Jay Lorsch, who recently surveyed 132 CEOs around the
world. Their findings are clear. Eighty-two per cent of CEOs
agree that non-executive directors must do more than ask questions
- they must be sufficiently informed to contest management's
Challenging management intelligently is what directors are
paid for. Media autopsies of Enron, Worldcom, Tyco and Adelphia
- and we've had a few in Canada -- point to directors failing
to act in the face of obvious red flags. If you believe that
fire is first revealed by smoke, good directors must be diligent
about watching out for smoldering issues before flames erupt.
Directors should exercise controls over management, rather
than management controlling directors.
I recognize, especially for large and diversified companies,
that effective governance requires a great deal of preparation
and a high level of director engagement. However, according
to the same Harvard study, only 56 per cent of CEOs agreed
that directors were well prepared for board meetings.
Even more revealing, only about 40 per cent of CEOs said
their directors took time outside of regular board meetings
to learn about their business. Frankly, this is unacceptable.
CEOs need an active and engaged board to help ensure that
the actions of management create value in a responsible and
The best directors, in my mind, are excellent coaches who
are not interested in getting in the way of the players on
the ice, but in pushing strategy in the right direction by
challenging assumptions, pushing for focus, and demanding
clarity in execution.
Much has changed since Irving Olds equated directors to
parsley on fish -- decorative but useless. Unfortunately,
this is what many in management used to want from their boards.
But experience has taught us that management is much better
off when they have a committed and able board. Indeed, various
studies show there is a direct link between governance practices
and bottom-line performance.
As a CEO, I can't stress enough that there is more to good
governance that ticking off boxes in a ratings survey to meet
the requirements of Sarbanes-Oxley, the OSC, the SEC and various
stock exchanges. It's quite possible to have a board that
is totally independent and unrelated and that meets all the
requirements of the various regulatory agencies but, at the
same time, have a board that is totally ineffective.
When you cut through it all, apart from regulatory requirements,
good governance comes from having a strong-willed board that
has done its homework and is prepared to speak up and constructively
challenge management on its basic strategy and on vitally
important and sensitive issues such as executive compensation.
Stated differently, good governance is more a matter of
values than a process of law. When talking about good governance
from a Board of Directors, we should always remember that
it is easier to "believe in what you stand for"
than to "stand up for what you believe in."
The record clearly shows that virtually all directors are
prepared to "believe in what they stand for," but
far too few are prepared to rock the boat and "stand
up for what they believe in." It's just too easy to "go
with the flow."
When considering all the corporate debacles over the past
five years, it's troubling to note how few directors have
resigned from boards on points of principle - almost none
and when they do it is too late. Again, it's just
too easy to rationalize any particular corporate decision
and "go with the flow."
It's no secret that the role of a director has become much
more difficult. As The Economist recently reported
in an article entitled "Where's all the fun gone?"
directors are now faced with longer preparation time, more
information to digest, more time-consuming and detailed meetings,
and more legal liability. But the role is an essential part
of our capitalist system, and when it fails, so does the system.
In conclusion, I would hate to leave the impression that
I would hold boards responsible for performance, or for anticipating
or preventing all problems from occurring. The primary responsibility
for performance lies with management; however, the directors
play a critical role. Boards can constructively challenge
management, influence performance, establish standards, provide
strategic direction and influence culture, and we will be
better off for it.
A strong board can be a great asset to management, and those
that fail to realize this are not only missing an opportunity,
they are failing in their responsibilities.
The Institute of Corporate Directors is playing an important
role in helping to build better boards by educating directors
and setting high performance standards. Perhaps part of that
education should be a course on how management can effectively
capitalize on its board of directors.
I would like to close by once again extending my thanks
to the Institute for the great work they do, and my sincere
congratulations to Larry Bell, Dick Currie, Guylaine Saucier
and Harry Schaefer for their commitment, leadership and foresight
in the area of corporate governance.